There are a few factors that need to be considered when deciding the best way to go about this. For example, if your contract is deemed to fall inside IR35, you will be restricted to paying yourself a salary.
On the other hand, if your contract falls outside of IR35, you'll then have the option of drawing a salary and dividends to maximise tax efficiency.
If you're contracting through an umbrella company, you'll receive a salary from your provider (similar to how you'll be paid if you were a permanent employee).
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Is a contractor an employee?
Contractors can be self-employed, a worker or an employee. Those who are employed through an umbrella company or an agency could be considered a worker or an employee.
If a contractor is a sole trader or runs a limited company, he or she will then be considered a self-employed person.
How do I pay an employee?
If you're paying an employee for the first time, you'll need to set up payroll. You need to take the following steps:
- Register as an employer with HM Revenue and Customs (HMRC) and get a login for PAYE Online.
- Choose payroll software to record employee's details, calculate pay and deductions, and report to HMRC.
- Collect and keep records.
- Tell HMRC about your employees.
- Record pay, make deductions and report to HMRC on or before the first payday.
- Pay HMRC the tax and National Insurance you owe.
How do I pay a Limited Company Pension?
If you're operating as a sole trader, you can contribute to a personal pension scheme.
If you're a limited company director, you can make pension contributions as an individual (as an employee), as well as through your company (as an employer). For the latter option, your pension contributions are paid directly from your business bank account.
How do I become a contractor?
To become a contractor, you need to:
- Do your research: The first step you'll need to do is to conduct in-depth research, and think through various important factors-from finances and tax implications, to lifestyle and business opportunities-to ascertain if becoming a contractor is the right decision for you.
- Decide on how you'll operate: As a contractor, you may operate as a sole trader, through your own limited company, or work with an umbrella company or recruitment agency.
- Develop a business strategy: Strategic planning isn't set in stone-but working out a plan is still helpful, as it is a way for you to consider multiple perspectives, identify potential opportunities and pitfalls and conceptualise back up plans you could fall back on.
- Get your business finances and insurance sorted out: Setting up a business bank account, registering a company, determining the level of accounting support you need and investing in business insurance are important aspects you need to sort out before you begin contracting.
What are Directors Loans?
A director's loan is defined as money taken from your company that isn't either of the following:
- A salary, dividend or expense treatment
- Money that you've previously paid into or loaned the company
A Director's Loan Account (DLA) is a record of all transactions between the company and its directors. It records not just the money owed by the directors, but also the money owed to them.
Director's loans can be used:
- when you need to access money in your company-apart from what you take out as a salary, dividend or expense treatment-for personal reasons.
- for a variety of purposes, such as covering the costs of a home repair bill, travel plans or any unforeseen personal expenses that may arise.
What is the optimal salary for a Company Director?
The optimum salary for a contractor to pay themselves in the current tax year is dependent on their overall income throughout the period.
In the instance there is no other income to be considered, it is generally recommended that salary is paid in line with the Secondary National Insurance threshold which is currently £732 per month (20/21).
What is a contractor?
A contractor is a professional that provides skills and services to a specific client under set terms. The terms can be for a set number of hours, a certain time frame or duration of a project.
A contractor is responsible for their own dealings and has discretion over the work they carry out.
Contractor Business Services UK
Firstly, we'll start with the services that we provide which covers the critical things you'll need to start and operate your contracting business.
For those just getting started, we provide free company registration on Companies House. This is typically done within 24 hours of submitting your details to Forma. It can take under 5 minutes to provide all your details and we'll just need a proof of ID and proof of address for each of the company directors.
We cover all of your key company filing requirements like annual accounts, confirmation statements, corporation tax and ensuring you meet all filing deadlines.
We also help with your annual Self Assessment which is a requirement for all company directors.
How to Become a Contractor
So, you're thinking of becoming a contractor.
There's probably one of three reasons driving this:
You've received a Job Offer
You've just received a job offer, and now need to decide on whether to set up a limited company, umbrella company or become a sole trader (or you may not have the choice in deciding).
You're in the right place.
This guide will walk you through the best company structure for you, accounting support, VAT, business services you need to consider and finding new opportunities.
You want to increase your pay
You'd like to increase your pay by switching from permanent roles to interim/ contractor roles.
Contracting can be very lucrative.
You'll need to be comfortable with a certain level of risk (short notice periods), increased monthly admin (as a Limited Company) and less benefits than being an employee (paid leave, sick days).
However, you'll earn more, get greater flexibility and hopefully grow a consulting business.
Getting multiple requests for your services? Amazing.
Setting yourself up as a contractor through a Limited Company means you can start expanding your client base rapidly and work on different projects a few days a week.
You can still set this up as a current PAYE employee of a company, and this can be a great stepping stone to launching your own business.
Let's talk about the right business structure for you.
Contractors - should I be paying myself salary and dividends?
As a contractor, how you pay yourself will vary depending on whether your contract is subject to IR35.
- Contract subject to IR35 (inside): Salary
- Contract not subject to IR35 (outside): Salary, dividends + reimbursing any expenses you have paid for out of your own pocket
We've provided a more detailed explanation in our Forma Help Center resource.
How do I repay a Director's loan account?
There are various ways to repay a director's loan.
- Dividend: A dividend can be declared, and the money can be used to pay off the loan instead of being transferred to the director's personal account.
- Cash repayment: A repayment is made by transferring money into the company account.
- Expenses or salary: The loan can be paid off using other money to the director, such as the director's salary or expense reimbursements.
How do I pay a Contractor?
You can pay an independent contractor by an hourly or daily rate, or by the project through the contractor's preferred payment method. You won't need to withhold taxes, as they are responsible for paying their own income and National Insurance contributions.
What is a Contractor?
You've been thinking about making the leap from employee to self-employed. If contracting is one of the options you're considering, this article is for you.
We'll run you through the basics, including what it means to be a contractor, how it differs from full-time employment and the type of business structures that contractors typically choose.
Contractors are self-employed individuals who provide services to a business. Generally, they're highly skilled, and are hired for projects that require specialist skills or to bolster a team during busy periods.
How to calculate holiday pay for overtime and commission payments
"What are the rules around holiday pay?" is a common question often asked by employers.
It can be confusing, as regulatory changes mean that employers now need to consider additional elements when working out an employee's holiday pay.
Simply put, employers now need to include regular commission and regular overtime payments when calculating an employee's or worker's holiday pay.
This is explained in further detail below:
What is a directors loan account?
As a limited company director, you can access the money in your company bank account through a facility known as a director's loan.
This can come in handy in instances when your personal finances are in need of a boost, yet taking out a director's loan is a decision that requires careful consideration. That's because there are tax and accounting implications, and it's best to speak to an accountant so that you fully understand the consequences.
But before you dive into the details, you'll need to have an understanding of the basics-such as what a director's loan account is, what the loan can be used for, tax rules you need to be aware of and more.
Here's where our guide comes in:
How do I pay national insurance?
How you pay your National Insurance contributions depends on your employment status.
If you're an employee, your National Insurance contributions are deducted from your wages before you receive your salary. Your contributions are reflected in your payslip.
If you're a limited company director, you may also be an employee (at your own company). As such, you pay Class 1 National Insurance through your PAYE payroll.
If you're self-employed, you pay Class 2 and Class 4 National Insurance depending on your profits. The majority of self-employed workers pay National Insurance through Self Assessment.
If you're employed and self-employed, your Class 1 National Insurance will be deducted through your wages. You may also need to pay Class 2 and Class 4 National Insurance depending on your self-employed profits.